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End of the week report: Spain, QE3 and Gold Prices

“After rapidly rising between mid-August and mid-September, Gold has since been consolidating,” BNP Paribas analyst Anne-Laure Tremblay said. “Short term, we could see a limited correction before the price resumes its ascent. The U.S. dollar has been strengthening of late, particularly against the euro. This is likely weighing on the Gold price. Beyond this, the Gold market is just taking a breather, as it is not far off the $1,800 an ounce level, which constitutes a strong resistance.” The break in price in Gold has not gone unnoticed by investors. Gold-backed funds increased by almost 300,000 ounces this week according to reports. One piece of news that also gained attention this week is the amount of Gold that countries have been adding to their central banking systems. South Korea and Paraguay lead all other countries by adding more than 24 tons of Gold to their reserves in July alone. “Whether you’re looking at physical flows into ETFs or the options market, activity has clearly been on the bullish side, and that will see prices move higher as we go through the fourth quarter,” said Credit Suisse analyst Tom Kendall.

QE3 Questions?:

Not all members of the U.S. Federal Reserve appear to agree on the benefit or effectiveness of the recently announced new round of quantitative easing (QE3). Charles Plosser, President of the Federal Reserve Bank of Philadelphia, is concerned that not only will the new bond-buying program not work, but that it might also call into question the credibility of the U.S. central bank. “We are unlikely to see much benefit to growth or to employment from further asset purchases,” said President Plosser. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.” U.S. investors are buying U.S. Treasuries at a quicker pace than international investors for the first time since 2010. This has certainly contributed to the U.S. debt climbing above $16 trillion USD for the first time. U.S. Treasuries have become popular despite their record-low yields because many investors also share the concern that QE3 will not succeed in stimulating the economy and creating more jobs. International investors still own 50.4 percent of the U.S. Treasuries, but this is down from the 55.7 percent share owned in 2008.

Spanish Gamble?:

Spanish Prime Minister Mariano Rajoy seemed to be gambling with his country’s well-being. The latest speculation out of Spain was that Rajoy was delaying a bailout request because he believed that issues in Italy will worsen, making the bailout terms friendlier for Spain when it does finally request a bailout. Raphael Gallardo of Rothschild Asset Management said that Spain “would be in better company and would suffer less of a stigma if it was to ask for a rescue at the same time as Italy. Italy needs further austerity efforts so those are probably more reachable with the support of the European Union and the ECB.” Protests on the streets of Spain intensified during the week as the country began to roll out economic reforms along with its new budget. Prime Minister Mariano Rajoy said, “We know what we have to do, and since we know it, we’re doing it. We also know this entails a lot of sacrifices distributed… evenly throughout the Spanish society.” His words, and the measures he intends to enact, are not enough to soothe all dissenting voices. A member of parliament was quoted as saying, “On paper they can make it all add up, but it will be hard to make the budget credible given all the reasonable doubts on the deficit target. It will be really tough to make the markets buy it.” An audit of Spanish banks was also expected to be completed this week. The eurozone’s third largest economy has seen much trouble lately, and has been hit hard by the housing crisis. Citizens of Madrid continue to protest the announced austerity measures , and one region of the country has even threatened to break away from Spain. The overwhelming expectation is that these measures are the first part of Spain formally requesting a bailout from the European Union. At one point, Spain was feared as “too big to fail,” or at least too big to bail out, so it will be interesting to see how the EU handles this situation.